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Spain: Constitutional crisis creating regulatory uncertainty

Risk Outlook

On 30 October 2017 the Spanish central government took direct control of Catalonia after having suspended the region’s autonomy and calling for fresh elections. This was a response to the Catalan regional legislature's approval of the independence declaration on 27 October 2017. Spain's Attorney General José Manuel Maza has called for charges of rebellion, sedition and misuse of funds to be brought against Catalan leaders. Developments to this crisis will continue to drive civil unrest, particularly in Barcelona. The crisis will undermine Spain’s recent economic progress and could create significant uncertainty for firms operating in the region. Nonetheless, it is unlikely that Catalonia will secede from Spain in the two year outlook.

Security Environment

On 28 October 2017 Spanish Prime Minister Mariano Rajoy activated Article 155 of the constitution, which allows the central government to suspend Catalonia's autonomy. Former President of the Government of Catalonia, Carles Puigdemont, was removed from office together with at least 150 of his government officials for having proceeded with the declaration of independence of Catalonia on 27 October 2017. Mr Puigdemont is now in Belgium and it is unclear whether he has commenced proceedings to seek asylum in Belgium. Spain's Attorney General José Manuel Maza has called for charges of rebellion to be brought against Catalan leaders involved in orchestrating the independence referendum.

The chief of the regional police force, Josep Lluís Trapero, has also been removed as the head of the Mossos d'Esquadra, as sedition charges have been levied against him and Juan Ignacio Zoído, Spain’s interior minister, is now responsible for security in Catalonia. It is also likely that Madrid will restrict funding and assume control of certain institutions, including the public broadcaster TV3.

Support for independence will remain strong, although we do not expect that secession will occur. Mr Rajoy has called for a snap ballot election on 21 December and pro-independence parties will determine how they will take part over the coming weeks.

The imposition of direct rule makes further public unrest likely in the coming weeks. Civil unrest occurred on referendum day throughout Catalonia, as Spanish police attempted to stop people from voting. The Catalan government stated that at least 840 people were injured as police used rubber bullets to disperse people. Further protests have occurred since the activation of Article 155; however, Madrid seeks to respond proportionally to avoid the violent clashes from referendum day.

Attempts to seize control of Catalan institutions could draw tens of thousands of people to the streets in Barcelona, causing significant traffic disruption. Spanish police are likely to use rubber bullets and batons to disperse crowds, elevating injury risks for bystanders.

Trading Environment

The political crisis is likely to undermine recent positive developments in the Spanish economy. In October 2017, it was reported that in the weeks following the referendum tourist activity in Catalonia fell by 15% when compared to 2016. Catalonia relies on tourism for 12% of GDP and a 20% decline in bookings would represent an estimated EUR 1.1 billion loss to the economy. Given that Catalonia accounts for 19% of Spain's nominal GDP, underperformance in such a critical sector will have a knock-on impact for the wider economy. The Spanish government has revised its 2018 economic forecasts in light of the constitutional crisis. It now expects that economic output will grow by 2.3% in 2018, instead of the previous figure of 2.6%.

In the event of secession, both Spain and Catalonia would suffer economically. Spain’s tax-raising abilities would be significantly reduced, and this would weigh on the country’s fiscal position. However, Spain would remain a large European economy and has worked to tackle its fiscal and current account deficits in recent years.

This should prevent any sustained deterioration in the sovereign credit position. However, as an independent state, Catalonia would lose substantial financial support from Madrid, severely weakening the liquidity position.

Until an independent Catalonia is able to establish alternative funding sources, it will likely possess a weak sovereign credit profile.

Investment Environment

The constitutional crisis is generating significant legal and regulatory uncertainty for firms with operations in Catalonia. A number of banks have already taken action to minimise the risk of deposit flight in the case of secession. CaixaBank has relocated its headquarters from Barcelona to Valencia, whilst Sabadell has moved to Alicante. This should insulate the banks from secession-related risks, and will facilitate continued access to the Spanish Fund for Orderly Bank Restructuring and the European Central Bank.

Further relocations by companies in a range of sectors are likely, particularly as the government has approved a decree in response to the crisis that allows relocation decisions to be made by company boards without shareholder approval. For example, energy firm Gas Natural Fenosa has temporarily shifted its headquarters to Madrid.

Attempts to seize control of Catalan institutions could draw tens of thousands of people to the streets in Barcelona to prevent, causing significant traffic disruption. Spanish police are likely to use rubber bullets and batons to disperse crowds, elevating injury risks for bystanders.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Guinea, Indonesia, Togo and United Arab Emirates, all of which have been the subject of recent enquiries from JLT's client base.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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